“If you don’t find a way to make money while you sleep, you will work until you die.”
– Warren Buffett
I was able to replace my salary with passive income in three years.
Today, I want to tell you how I did it.
Now, I know you might be thinking: “I can always make more money.”
I thought that, too.
At my medical sales job, I made $200,000 per year.
But I didn’t just want financial freedom.
I always wanted time freedom.
According to this article from the Journal of Happiness Studies, having free time management can have a positive effect on one’s quality of life and lead to a better well-being.1
Last year, I was able to travel internationally six times.
By developing a passive income, you open up so many doors for your own personal freedom.
If that sounds good to you, let’s jump into it!
1. Identify Your “Rat Race Number”
I want to start with an example.
Let’s say you invest $100,000 per year at a 15% annualized return.
Over the next three years, you take what you make from that deal and reinvest.
After three years, you’d have $61,020 per year in passive income.
That was enough for me to be able to leave my job!
It didn’t cover full income of $200,000, but I didn’t need it to.
I needed around $60,000 to $70,000 a year to cover living expenses.
After I reached that amount, work was optional.
Oftentimes, we feel like we have to replace all of our current income.
But you don’t need to!
You can look at your living expenses and see what you need in order to make work optional.
This is called your rat race number.
Don’t get too carried away, though!
You shouldn’t be eating Top Ramen every day and never travel.
Instead, think about the number you need to live the life you want to live.
For me, the number was pretty small at $5,000 to $7,000 per month.
Another person’s number might be $10,000 per month or more.
This is where passive income is way more powerful than active income.
Instead of working for your money, the money works for you.
2. Choose the Right Investment Vehicles
Next, you should choose the right investment vehicles.
Investments like stocks don’t provide income very often.
Instead, we’re faced with questions like appreciation versus cash flow.
Which one is better?
Appreciation makes investments worth more but doesn’t put money in your pocket.
It doesn’t pay for your mortgage or insurance or other expenses.
That’s why I love to choose investments that provide cash flow.
These investments are things like multifamily, other syndications, and business opportunities.
All of those deals will put that money in your pocket.
If you have a higher net worth, don’t put all of your money on one thing.
Put a little bit in different deals.
But be careful when you do!
According to this study on multi-period portfolio selection, investing in different assets can both maximize or minimize total risk.2
Then, over time, you can learn to scale up.
3. Develop a Strategy for Scaling Your Investments
Scaling up investments helps you reach your investment goal as you start building your passive investments.
It’s like a muscle you didn’t know you have.
And for many of us, this might be your first time even using it!
We’ve only been taught about finance by Wall Street and stuff you see on TV.
Those avenues don’t have our best interests in mind, especially Wall Street.
I used to be an investment advisor and saw their schemes firsthand.
Don’t pay them any attention.
Instead, start down your own road to financial freedom.
If you can grow your passive income by $10,000 per year or get into your first deal, that’s huge!
It’s not just about how the deal works out.
It’s what you learn along the way.
Now I want to hear from you!
How have you grown your passive income?
Are you interested in any specific asset classes?
Let’s get the conversation going in the comments.
Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.
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Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.
Works Cited
1. Wei-Ching Wang, Chin-Hsung Kao, T. Huan and Chung-Chi Wu. “Free Time Management Contributes to Better Quality of Life: A Study of Undergraduate Students in Taiwan.” Journal of Happiness Studies, 12 (2011): 561-573. https://doi.org/10.1007/S10902-010-9217-7.
2. Sini Guo, Lean Yu, Xiang Li and S. Kar. “Fuzzy multi-period portfolio selection with different investment horizons.” Eur. J. Oper. Res., 254 (2016): 1026-1035. https://doi.org/10.1016/j.ejor.2016.04.055.
